What relief rally? Hope that the stock market would surge on news of Washington's debt ceiling deal has given way to pessimism. Increasingly defensive-minded investors are adapting to the reality that the economic recovery is stalling, if not ending.
Stocks rose slightly on Wednesday to snap an eight-day string of declines that sent prices down nearly 7 percent.
That stumble complicates matters for investors who recently pulled cash from the market, fearing a government default was a strong possibility. With that worry behind, the question is what to do next.
Richard Shortt had expected to be buying stocks, putting his sidelined money back to work. Yet he was at his home computer Wednesday, selling some of his stocks, and trimming investments in stock mutual funds. The 66-year-old from Somerville, Mass. put the proceeds into safer money-market mutual funds _ the same actions he took last week, when he sold stocks before Congress and President Obama reached the debt ceiling deal.
Shortt kept selling because he worries there's a growing risk that the economy will slip back into recession. He notes the debt deal emphasizes spending cuts, without revenue increases, or stimulus spending that he believes is needed to create jobs.
"It just doesn't seem like a formula for very happy times, for a long, long time," says Shortt, a semi-retired small business consultant. "I'm preparing for a long downturn, but leaving options open, to see if things do change."
President Obama's spokesman said Wednesday that the administration doesn't believe there's a risk that the economy will head back into a recession.
But investors like Shortt have become more cautious in response to troubling news, such as Tuesday's report that consumers cut spending in June for the first time in nearly two years. A weak manufacturing report came out a day earlier, and the government last week said the economy's growth in the first half of this year was the weakest since the recession ended in June 2009. Another influential report is due Friday, when the government will release its employment data for July, which will include the unemployment rate and number of jobs created.
Yet some sense an opportunity. The market research firm Birinyi Associates on Wednesday said that market indicators it tracks suggest stock prices could be set to rebound. Birinyi said too many investors have left prematurely, which creates an opportunity for buyers.
Still, many are anxious:
_Stocks: The Dow Jones industrial average on Wednesday finished up 0.3 percent. But it was down most of the day, which put the market at risk of posting its longest losing streak since 1978, the last time there were nine daily declines in a row.
After the recent losses, a broader stock index, the Standard & Poor's 500, is almost exactly where it started the year.
Investors withdrew a net of nearly $8.8 billion from stock mutual funds during the week that ended last Wednesday, according to the Investment Company Institute. Investors also pulled money from international stocks funds, withdrawing a net $1.3 billion.
_Gold: Prices hit a new record on Wednesday, not adjusted for inflation, topping $1,670 an ounce. Gold prices have risen nearly 13 percent since July 1, and have steadily risen since the start of 2009, when an ounce of gold sold for $880.
Investors believe gold is safe because it tends to hold its value when stocks are falling, and often rises when the dollar falls in value against other currencies, as it did Wednesday.
HSBC precious metals analyst James Steel said in a report that gold's continued rise after the debt deal was reached indicates the rally "is clearly supported by more than just the long drawn-out political arguments over the debt ceiling."
_Treasurys: Prices for Treasury bonds have been rising since the debt deal concluded, reflecting greater investor demand for the government IOUs. Their reputation as a safe haven has been renewed now that the government avoided a default. Treasury yields move opposite their prices. On Wednesday, the yield on the 10-year Treasury slipped as low as 2.56 percent, its lowest level since November. That's even though Moody's Investors Service assigned a negative outlook to U.S. debt, but confirmed its AAA rating, for now.
_Money-market mutual funds: Investors had been withdrawing huge sums from these investments a few days ago, but reversed course once the debt ceiling deal was signed into law. Money funds are typically safe places to stash cash, because they invest in only the safest forms of debt securities. But many money funds invest in Treasurys, a fact not lost on investors who withdrew money as the debt ceiling talks stalled. Nearly $122 billion was withdrawn from money funds in the seven-day period that ended Monday, a surge that cut the $2.6 trillion that the funds hold by almost 5 percent, according to Crane Data. But there was a shift on Tuesday with the debt deal's conclusion, with a net $6 billion flowing back in. That new cash suggests investors once again see money funds as safe.
_Volatility: The stock market's fear gauge, formally known as the Chicago Board of Options Exchange's Volatility Index, has risen to levels last seen in August 2010. The VIX, as market pros call it, is up 35 percent over the past eight trading days. In an unusually volatile market, investors are willing to pay hefty premiums for options that offer protection from price swings of stocks in the Standard & Poor's 500 index.
The recent return of volatility worries Harvey Rowen. He's trying to figure out when to shift more money into stocks on behalf of individual investors whose portfolios he manages as CEO of San Francisco-based Starmont Asset Management.
About 80 percent of the clients that Rowen's firm contacted during the debt ceiling debate chose to sell a portion of their stock holdings and leave the money in cash. But Rowen was reluctant Wednesday to move that money back into the market, noting that negative economic reports have offset positive news from the debt deal.
He's considering adding more alternative investments to the portfolios, such as gold and other commodities, but worries they carry big risks as well.
"It's a hard question now what to do," says Rowen. "It's a struggle to find investments that are prudent, and will give our clients a reasonable return....So for now, we're sitting on that cash."